In the field of technical analysis, the deductible price is a critical concept closely related to the calculation of moving averages (MA). It is primarily used to determine trend changes in moving averages and potential support or resistance levels in price movements. Below is a detailed explanation covering its definition, calculation method, role, application scenarios, and considerations:
I. Definition of Deductible Price
The deductible price refers to the price data from a specific period ago in the calculation of a moving average. When the period of the moving average is fixed, as new price data is added, the oldest price data is “excluded,” and this excluded price data becomes the deductible price for the current period.
- Core Logic: Moving averages reflect trends by averaging prices (e.g., closing prices) over a period. Each time new data is added, the earliest data is removed. Thus, the deductible price essentially represents the “old data” replaced in the “metabolism” of moving averages.
- Example: For a 5-day moving average (MA5), suppose today is the 6th trading day. When calculating MA5, prices from Day 2 to Day 6 are used, and the price from Day 1 is the deductible price. As time progresses, when calculating MA5 tomorrow, the price from Day 2 will become the deductible price, and so on.
II. Calculation Method of Deductible Price
The deductible price is calculated based on the specific period of the moving average, using the following formula:
Deductible Price = Closing Price N Days Ago (where N is the period of the moving average)
- Examples:
- To calculate the current deductible price for MA10, use the closing price from 10 days ago.
- To calculate the current deductible price for MA20, use the closing price from 20 days ago.
Note: The deductible price is only related to the period of the moving average, not the current price, but it affects the slope change of the moving average.
III. Role of Deductible Price
The main role of the deductible price is to predict trend reversals in moving averages, specifically in the following two aspects:
1. Judging the Turning Direction of Moving Averages
- When current price > deductible price, the value of the moving average rises due to “new data being higher than old data,” potentially pushing the moving average to turn upward and indicating a short-term bullish trend.
- When current price < deductible price, the value of the moving average falls due to “new data being lower than old data,” potentially causing the moving average to turn downward and indicating a short-term bearish trend.
- Case: If the deductible price of MA5 is $10 and the current price is $12 (> $10), the MA5 value will rise, possibly shifting to an upward trend. If the current price is $8 (< $10), MA5 may turn downward.
2. Identifying Support and Resistance Levels
- When the price approaches the deductible price, the historical price range corresponding to the deductible price may become a potential support or resistance level.
- If the price approaches the deductible price from below, and the deductible price corresponds to a previous high, it may form resistance.
- If the price approaches the deductible price from above, and the deductible price corresponds to a previous low, it may form support.
IV. Application Scenarios of Deductible Price
1. Trend Analysis and Inflection Point Prediction
- Short-term moving averages (e.g., MA5, MA10): Suitable for identifying short-term trend reversals, as the impact of deductible prices is more sensitive, making it ideal for short-term trading.
- Long-term moving averages (e.g., MA60, MA120): The impact of deductible prices spans a longer period, helping identify medium-to-long-term trend changes, suitable for medium-to-long-term positioning.
2. Strategy Formulation Combined with Price Trends
- Bullish scenario: If the price consistently stays above the deductible price and the moving average diverges upward, it signals a bullish trend, suitable for buying or holding.
- Bearish scenario: If the price consistently stays below the deductible price and the moving average diverges downward, it signals a bearish trend, suitable for selling or staying 观望 (waiting and watching).
- Consolidation scenario: When the price fluctuates around the deductible price and the moving average flattens, it indicates a market consolidation period, requiring cautious operation.
3. Integration with Other Technical Indicators
- The deductible price can be used alongside indicators like trading volume, MACD, and RSI to improve judgment accuracy. For example:
- When the price breaks through a resistance level at the deductible price, a surge in trading volume enhances the validity of the breakout.
- When a moving average inflection signal coincides with a MACD golden cross/death cross, the probability of a trend reversal increases.
V. Considerations
- Lagging Nature of Deductible Price
The deductible price is calculated based on historical data and is a lagging indicator. It should not be used as the sole basis for trading decisions but should be combined with real-time prices and market sentiment for comprehensive analysis. - Applicability Across Different Periods
- Deductible prices for short-period moving averages change rapidly, making them suitable for capturing short-term fluctuations.
- Deductible prices for long-period moving averages are more stable, making them better for judging long-term trends.
- Impact of Market Conditions
In extreme market conditions (e.g., sharp crashes or rallies), the reference value of deductible prices may diminish, requiring adjustments to strategies by incorporating fundamental analysis and market news. - Flexible Period Adjustment
Adjust the moving average period according to trading style (e.g., MA5 for short-term trading, MA30 for medium-term trading), and correspondingly focus on deductible prices for the selected period.
VI. Conclusion
The deductible price is one of the “underlying logics” of moving average analysis. By tracking the relationship between the deductible price and current price, traders can predict changes in moving average trends in advance and formulate trading strategies. However, it is important to note that technical analysis is not foolproof. In practical applications, it should be combined with multi-dimensional information to avoid misjudgments from relying on a single indicator. For beginners, practicing with deductible prices of short-period moving averages first can help gradually understand their interaction with price trends.
Interpretations of other chart patterns are available in chart patterns
